Featured Article: Jeff LaBelle on Capital Gains Taxes And The “Step-Up Basis”
How Proposed Tax Changes During Inflationary Times Could Affect Capital Gains Taxes And The “Step-Up Basis”, From Jeff LaBelle Of Gulf Coast Wealth Advisors
Tax laws and codes are undergoing the overhaul that always comes with a new president and political party taking the reins. One area where tax changes may be seen is in the “step-up basis”, also referred to as the “step-up cost basis” which adjusts the capital gains taxes applied to investment assets passed on to beneficiaries when someone dies. Jeff LaBelle, President, and CEO of Gulf Coast Wealth Advisors wants to get into a general explanation of what the step-up basis is and how the proposed changes in the tax code will affect people around capital gains should they pass.
The step-up basis currently in place is applied when a person inherits some form of capital assets such as bonds, mutual funds, stocks, and real estate, among other types of investment properties or assets. When this happens, the IRS will step up the cost basis of the asset, meaning a beneficiary will only be taxed on the amount of any profits in the increase in value from the date of inheritance, rather than on the amount gained from the original time of purchase. This allows for heirs to save a great amount of money on capital gains taxes on inherited investments. It is an area that is facing some proposed changes that would greatly affect how the capital gains tax is applied to inherited capital assets.
Under the current law:
“An asset that’s inherited from a deceased individual benefits from a step-up in cost basis. For example, if an individual purchased a stock with a cost basis of $10,000 and it had risen in value to $100,000 by the time that person died, the beneficiary of that stock would have the cost basis established at $100,000. This would avoid tax on the $90,000 gain that occurred while the initial owner held the stock.”
The proposed changes:
“The step-up in cost basis for inherited and gifted wealth would be eliminated. In the example above, this would mean that along with inheriting a stock valued at $100,000, the beneficiary would also inherit a tax liability on the $90,000 capital gain, significantly reducing the value of the inherited stock. This proposal includes certain transactions involving the sales and gifts to a grantor trust.”
As LaBelle explains, the capital gains tax will be the most hurtful tax. “Consider a farm owner or any business with a multi-million-dollar valuation. In most cases, the beneficiaries will have to sell the business to pay the tax. There will be no more step-up basis. This will hold true for stocks. Typically, an investment manager will hold highly appreciated stocks for older clients, utilizing the step-up basis strategy. Therefore, eliminating any tax, as the date of death is the new cost basis. With the proposed plan, the basis is the original purchase price.” This means that the value of that asset will be greatly decreased as the beneficiary also inherits the tax liability on the full amount of the capital gains.
LaBelle also gets into the topic of how consumer prices skyrocketed 5% in May, the fastest rate of increase recorded since August of 2008. COVID-19 has significantly impacted the supply chain due to the reduction of the workforce. Used cars and truck prices increased 29% over the past 12 months, home prices are skyrocketing, lumber shortage is pushing new build property costs higher, retail supply chains are heavily impacted driving prices up, and consumers are feeling the impact of these inflationary pressures, as businesses are offsetting these costs by passing them on to the consumer with rising prices for typically low to moderately priced goods and services. LaBelle worries this anticipated increase in taxes will compound these everyday financial pressures by tightening the disposable income many people have. An increase in taxes and decrease in extra income may prove quite problematic for those who then must pay large capital gains taxes on interested property and assets should these proposed changes take place.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Estate planning is done in conjunction with your estate planning attorney, tax attorney and/or CPA.
Investment decisions must be made on individual Risk Tolerance, Investment Objectives, and Time Horizon.
Jeff LaBelle is the president and CEO of Gulf Coast Wealth Advisors. LaBelle is a fee-based advisor who specializes in conservative customized portfolios. He has been in the financial advisor business since 1987, and currently has a thriving practice in Downtown Sarasota. Learn more and connect with Jeff LaBelle through the Gulf Coast Wealth Advisors website.
Jeffrey Labelle offers Investment Advisory Services through Kovack Advisors, Inc. an SEC Registered Investment Advisor, 6451 N. Federal Highway, Suite 1201, Ft. Lauderdale, FL 33308 (954) 482-7771. Gulf Coast Wealth Advisors is not affiliated with Kovack Advisors, Inc. Jeffrey Labelle is registered as an Investment Advisor Representative in Florida.